Ohio Senator Proposes Payday Loan Alternative That Allows Consumers To Access Early Tax Credits

For years, lawmakers have tossed around the idea of meaningful payday loan reform, from banning loans with annual percentage rates higher than 36% or looking to close loopholes that allow predatory lenders to claim tribal affiliation. This week, as Congress began its latest session, one lawmaker suggested a payday alternative that doesn’t involve another type of loan at all.

The Cleveland Plain Dealer reports that Ohio Senator Sherrod Brown’s proposed alternative to payday loans would allow consumers to claim part of their Earned Income Tax Credits when they find themselves short on cash.

The alternative, called Early EITC, would work by letting low-income workers claim small pieces of their tax credits midway through the year, rather than waiting to claim the entire credit during tax season.

Brown says that allowing taxpayers to access the money early may help consumers avoid the cycle of repeat borrowing and debt associated with payday loans.

“It would make such a huge difference in saving people from predatory lending,” Brown tells the Plain Dealer. “It could improve the lives of so many low-income people who are barely making it.”

If the proposal gains momentum, it wouldn’t be the first time consumers were able to draw against their EITC.

The tax credit forgives some federal payroll taxes for low-wage workers who otherwise would fall into poverty and works as an incentive to keep low-wage earners employed.

A previous program, called Advanced EITC, allowed workers to claim up to 100% of their EITC early, but because people lose eligibility for the EITC when their income rises above a certain level, many taxpayers feared that if they withdrew funds they would lose the credit and owe money to the government.

For those reasons the program had a usership of less than 3% of eligible taxpayers and was ended in 2011.

Brown says his proposal would protect users by capping the maximum they can claim early at $500. Individuals without dependents would only be allowed to claim $133.

Additionally, the new proposal would preserve the lump sum payment that EITC earners get at tax time, the Plain Dealer reports.

To access the early credits, consumers would have to go through their employers, who must then adjust their credits through the payroll department.

High-interest, short-term loans have long been held as one of the few options for cash-strapped consumers. A report from the FDIC last fall found that nearly one-in-four people have turned to payday loans to make ends meet at one time or another.

Sen. Sherrod Brown proposes letting low-income workers tap tax credits early to avoid payday loans [The Plain Dealer]

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.